You have a choice between a lottery lump sum payout of $5,509,253.62 today or a series of twenty annual annuity payments of $500,000 each (first cash flow one year from today).At what discount rate are you indifferent between the two choices?
A)4.50%
B)5.50%
C)6.50%
D)7.50%

Question

Quizplus · Accepted Answer

The present value of the annuity payments at a 6.50% discount rate equals the lump sum payout of $5,509,253.62, making you indifferent between the two choices.

You Have a Choice Between a Lottery Lump Sum Payout